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Barclays Scandal Was Born of Diamond's Derivatives Bet

"The external pressure has reached a level that risks damaging the franchise - I cannot let that happen," said Diamond in his resignation statement on Tuesday. To be seen is what Barclays' reputational damage will be. Chairman Marcus Agius, who temporarily took back a Monday resignation, will lead a search process for a new CEO.

In a Tuesday statement to the
BBC, U.K. Chancellor of the Exchequer George Osborne called Bob Diamond's resignation the "right decision."

Financial sector investors should be weary that Barclays problems are just a tipping point of widespread industry malfeasance. "The credit crisis has already claimed the jobs of many CEOs and post the revelations from Barclays of the Libor issues, may yet claim more," wrote Bank of America Merrill Lynch analyst Michael Helsby in a Tuesday note. Agius of Barclays also underscored concerns of the impact of a widespread Libor probe, in a Tuesday conference call.

Other large banks that set short-term rates such as
Citigroup (C - Get Report),
Bank of America(BAC),
RBS(RBS),
Lloyds Banking Group(LBG),
Credit Suisse(CS) and
UBS(UBS) may also be brought into an ongoing manipulation probe by regulators around the world.

Still, Diamond's departure is particularly tragic because of his contribution to Barclays and his instrumental role in pulling the bank through the crisis and transforming it to a leading global player.

When Diamond took the helm of Barclays Capital in the late 1990s, the unit was a small investment banking operation within Barclays - Britain's second largest bank by assets - and an even smaller piece of the global capital markets and underwriting community, where the likes of
Goldman Sachs(GS - Get Report),
Morgan Stanley(MS - Get Report),
JPMorgan(JPM - Get Report),
Deutsche Bank(DB) and
Citigroup(C - Get Report) have long held top positions. Impressively, Diamond spearheaded growth at the investment bank and a separate unit called
Barclays Global Investors, taking on Wall Street's largest players.

In fact, it was the investment banking and investment management businesses that Diamond grew and oversaw, which helped Barclays weather the 2008 financial crisis as peers like
Royal Bank of Scotland(RBS) were forced to take bailouts from the British government.

In 2008, Diamond made what may be the boldest bet of the financial crisis, buying Lehman Brothers U.S. investment bank, in a move that transformed Barclays Capital into one of the key players in global finance. Shortly thereafter, Diamond sold the Barclays Global Investors investment management and ETF unit he helped build to
Blackrock(BLK) for $13.5 billion, in a capital raise that averted a government bailout.

Diamond was rewarded for molding of Barclays Capital into a key part of Barclays overall earnings, and at the start of 2011, he took over as chief executive of the entire bank. In 2012, Diamond rebranded Barclays Capital so that it wouldn't stand separately from the larger retail banking operation centered in Britain, shaving off the "Capital" moniker from Barclays U.S. headquarters.